SCENESETTER FOR CODEL BAUCUS, DEC 16-20, 2008

UNCLAS SECTION 01 OF 04 HANOI 001342 SENSITIVE SIPDIS DEPT FOR H AND EAP/MLS H PLEASE PASS TO CODEL BAUCUS USTR FOR BISBEE E.O. 12958: N/A TAGS: OREP EFIN EAID ECPS ECON ETRD VM SUBJECT: SCENESETTER FOR CODEL BAUCUS, DEC 16-20, 2008 HANOI 00001342 001.2 OF 004 SUMMARY AND INTRODUCTION -------------- ¶1. (SBU) Embassy Hanoi looks forward to welcoming you to Vietnam. Prime Minister Nguyen Tan Dung's June visit to Washington exemplifies a U.S.-Vietnam relationship that continues to broaden and mature, in the process spurring economic, social and technological development that has eased the path for a limited expansion of personal freedom and expression for the people of Vietnam. A majority of Vietnamese view partnership with the United States as key to Vietnam's current development and future successful global integration. High-level visits like yours create opportunities for us to influence developments and respond to Vietnam's interest in globalization, reform, combating corruption, and enhancing educational opportunities for its people. Your particular interest in trade and investment coincides with one of the Government of Vietnam's (GVN) greatest challenges and priorities, as Vietnam's economy is going through a period of adjustment following tremendous growth in 2007. For these reasons, and despite our differences, Vietnam's leaders are committed to continued progress in bilateral relations and will speak with you optimistically about the future of U.S.-Vietnam ties. End summary. ECONOMIC SUCCESSES AND CHALLENGES -------------- ¶2. (SBU) After a decade of isolation and failed economic policies, Vietnam is determined to catch up with the Asian tigers. Vietnam's "doi moi" (renovation) program of economic reform, begun in 1986, has set the country on a successful market economy path, with an average growth rate of 7.5 percent over the past decade. A recent World Bank study described Vietnam's poverty reduction rate as the most significant in such a short period of any nation in history. The GVN focuses on exports and foreign direct investment in its drive to achieve middle-income status by 2010. Vietnam is second only to Thailand in rice exports, and second to Brazil in coffee. Other leading exports include crude oil, apparel, footwear and aquatic products. Vietnam is also "moving up the value chain" by increasing its exports of furniture, machinery, cameras, computers, printers, consumer electronics, and other diverse products. U.S. investors tell us the key challenges they face in Vietnam are underdeveloped infrastructure, a shortage of skilled workers and managers, the considerable level of state participation in the economy, and corruption. The Japanese government recently announced a freeze on low-interest loans to Vietnam until the GVN takes "meaningful" steps to eliminate corruption. ¶3. (U) The United States is currently Vietnam's largest export market and third largest overall trade partner. Total two-way trade in goods with the United States in 2007 was USD 12.53 billion, up 29 percent over 2006. One of the most positive stories from 2007 was the surge in U.S. exports to Vietnam, from USD 1.1 billion to USD 1.9 billion, driven by agricultural exports such as cotton (up 92 percent),soybeans (up 1,480 percent),and wheat (up 1,120 percent). U.S. commodities including hardwood, hides and skins, tree nuts, fresh fruit, and poultry and red meats also posted record gains in ¶2007. Driven by the technology industry, the United States is Vietnam's seventh largest investor, with USD 2.6 billion in registered FDI since 1988, and USD 2 billion more in "U.S.-related investment." ¶4. (U) Despite the global economic uncertainty, two-way trade in 2008 looks likely to once again break new ground and surpass last year's mark. Agricultural products continue to show exceptional growth. Chicken is up 564 percent, red meats up 983 percent, coarse grains 304 percent, soybeans 382 percent, wheat flour 675 percent, seeds 454 percent, and cotton 115 percent. ¶5. (U) Due to the sharp rise in meat imports, which generated complaints from Vietnamese producers, the GVN raised meat tariff rates. Some of the tariff increases were quite large. Due to WTO bindings negotiated during the accession talks, however, the tariff increase for the types of meats exported by the United States (generally frozen cuts and offal) are actually relatively small. The added cost for U.S. poultry meat exports will be about 7 percent, while the increases for beef and pork will be even smaller. ¶6. (U) At the same time that the GVN raised meat tariffs, they lowered tariffs on another group of U.S. exports--dry peas and lentils. With this latest reduction, tariffs on dry peas and lentils have fallen from 25 percent last year to 13 percent currently. Compared with other ASEAN countries, these tariffs are still relatively high, so U.S. volumes shipped here remain small. HANOI 00001342 002.2 OF 004 ¶7. (SBU) While the great majority of experts consider Vietnam's long-term economic prospects to be bright, short-term macroeconomic problems, which predate the current global financial crisis, caused major difficulties for the government earlier this year. These problems were high inflation (24.2 percent year-on-year November),a large current account deficit that put pressure on the currency, and inefficient allocation of resources due to the disproportionate amount of state assets devoted to powerful State Owned Enterprises (SOEs). In response, the Vietnamese implemented a series of fiscal and monetary tightening measures that were effective in stabilizing the currency, cutting the trade deficit, and reducing price increases. ¶8. (U) As these measures were taking hold, however, global economic problems worsened. Vietnamese banks were not heavily invested in sub-prime debt and were therefore not directly impacted by the U.S. financial crisis. Nonetheless, indirect impacts are now being felt in decreasing foreign direct investment, exports and capital markets. Vietnam has responded vigorously (too vigorously, some economists feel) by dropping interest rates 4 times in recent months, trimming reserve requirements, and widening the currency trading band. The GVN has also revised its 2009 GDP growth estimate down to 6.5 percent, although that figure is viewed as optimistic. Local economists predict that 5 percent will be more achievable. OUR TRADE AGENDA -------------- ¶9. (U) We have a broad trade agenda. Our focus is on maintaining momentum for improved market access for our exporters and investors. We have encouraged Vietnam to consider joining the Trans-Pacific Partnership regional free trade negotiations. We expect them to indicate soon whether they will participate. The first round of negotiations for a Bilateral Investment Treaty (BIT) will take place this month in Washington. Vietnam has requested GSP and we have told them they need to make improvements in labor rights and IPR protection. A Department of Commerce team will soon arrive in Hanoi for the first round of discussions on Market Economy Status for Vietnam. Commerce also recently determined in its third and last report on textiles and garments that Vietnam was not dumping in the U.S. We signed an Open Skies civil aviation agreement for cargo services last September. ¶10. (SBU) Vietnam currently accepts U.S. beef from cattle less than 30 months of age. USDA/APHIS has requested that Vietnam expand this access to allow all products and all ages of beef. The Vietnamese have drafted a risk assessment to address this issue and, from November 17-21, 2008, a delegation led by Vietnam's Director General for Animal Health came to review the U.S. BSE control system. The Embassy has indicated to the GVN the value of positively responding to this request in time for a formal announcement during your visit and the Embassy will continue to press for a response. BANKING AND FINANCIAL SERVICES -------------- ¶11. (U) Part of Vietnam's recent inflation problem was due to its booming banking sector. Credit growth was over 50 percent in 2007, with some newer joint stock banks growing loans at close to 90 to 100 percent. The economic downturn in early 2008 exposed weaknesses in the system and there are now a number of small banks receiving liquidity support from the State Bank of Vietnam (SBV). Vietnam is entering a stage where similar emerging countries have experienced failure of newly formed private banks. Analysts predict that an increase in non-performing loans at the end of the calendar year may bring about additional instability if local investors lose confidence in the banking system. State domination is a factor here, too, as state-owned commercial banks own 50-60 percent of banking assets. GROWING INTERNATIONAL AND REGIONAL ROLE -------------- ¶12. (SBU) Vietnam's economic successes have translated into greater international standing. Vietnam has taken seriously its responsibilities this past year as a non-permanent member of the U.N. Security Council, chairing the UNSC in July, and has boosted its participation in regional bodies such as ASEAN and APEC. While GVN leaders are not fully sure how to handle all the attention, they understand that the United States plays a direct role in fostering the conditions and providing strategic technical assistance for their nation's success. Leaders here are thankful, in particular, HANOI 00001342 003.2 OF 004 for the high-value assistance we have provided over the past seven years. USG technical assistance has earned a rare level of confidence and effectiveness at the heart of Vietnam's policy-making. Top GVN officials continue to request deeper and broader USAID assistance in many transformational areas and make clear their preference for U.S. expertise over that of other donors. The magnitude of our impact is limited only by current resource constraints. HUMAN RIGHTS -------------- ¶13. (SBU) Challenges remain, of course. GVN leaders assume the Communist Party's preeminent political role to be the linchpin of stability, and human rights remain a major sticking point in the bilateral relationship. China remains a critical strategic preoccupation, a fact that tempers Vietnam's willingness to accelerate ties with the United States. Still, most Vietnamese are enthusiastic about improved relations with the United States, viewing this as a key indicator of the tremendous progress since the dark days of international isolation in the 1970s and 1980s. For these reasons, and despite our differences, Vietnam's leaders are committed to continued progress in bilateral relations and will speak with you optimistically about the future of U.S.-Vietnam ties. USG ASSISTANCE AND EDUCATION -------------- ¶14. (U) U.S. assistance in areas other than HIV/AIDS and influenza remains very modest in relation to spending in smaller neighboring nations, but increased substantially in FY08 to more than USD 10 million due to earmarks for governance programming and de-mining. U.S. programs such as Support for Trade Acceleration (STAR) and the Vietnam Competitiveness Index have helped to reshape trade and economic regulation, with positive impact on governance throughout the country. Treasury is also starting to engage on economic issues, with programs in areas such as anti-money laundering, taxation, insurance and bond market development. ¶15. (U) Vietnam's schools and universities employ an antiquated teaching methodology (a theory-intensive instructional style),lack qualified instructors, and have poor facilities, all of which exacerbates the widespread incongruity between skills and requirements in the country's job market. GVN officials recognize the structural weaknesses in Vietnam's education system and are working to upgrade it. The United States is involved in education in Vietnam in several ways. The Fulbright Program provides scholarships for two-year Master's Degree programs at American universities for 25 Vietnamese students each year, and the Vietnam Education Foundation sends more than 40 students to the U.S. for Ph.D. study in the hard sciences every year. The Fulbright Economic Teaching Program, in Ho Chi Minh City, provides high quality training in economics and public policy for mid-level administrators. In addition, the U.S. Mission actively assists American universities and colleges wanting to set up programs at Vietnamese schools, which helps increase the number of graduates with the skills needed by American companies in Vietnam. In addition, EducationUSA Centers in Hanoi and Ho Chi Minh City provide information and counseling to students wanting to study in the U.S. HUMAN RIGHTS CHALLENGES -------------- ¶16. (SBU) Serious deficiencies related to human rights in Vietnam include lack of freedom of speech, assembly, and the press. One of our key objectives is to end the use of catchall "national security" provisions for the prosecution of peaceful dissent. Since September 2008 alone, over a dozen political activists have been arrested for their peaceful dissent against Vietnam's policies. We continue to call for the release of all prisoners of conscience, but where we see individuals expressing their political opinions, many of our government interlocutors see "lawbreakers" trying to destabilize the regime. ¶17. (SBU) The recent conviction of two award-wining Vietnamese reporters in the wake of their reporting on a high-level corruption scandal, and the conviction of a noted blogger on unfounded charges of tax evasion reveal the declining state of freedom of the press. A new draft Press Law, including a draft circular on measures to register and control blogs, further illustrates the suspicion and unease the government has for any expansion of expression. The continued existence of groups in the United States that advocate regime change complicates human rights engagement by providing HANOI 00001342 004.2 OF 004 ammunition to hard-liners who want to stoke the fading paranoia that we are indeed still "the enemy." Reassuring the GVN that the USG does not support separatist groups, while reinforcing the role of the media in stemming corruption can assist in building a better human rights dialogue based on mutual trust. ¶18. (SBU) Real progress has been made in the area of religious freedom. The government continues to recognize new religions, including several new Protestant faiths in the past six months, and religious observance in Vietnam is quickly growing. While problems remain, particularly in outlying areas, we removed Vietnam from our list of countries of particular concern for religious freedoms in late 2006 due to overall continued improvement. WAR LEGACY ISSUES -------------- ¶19. (SBU) While debate continues over the possible human effects of exposure to dioxin, a contaminant in the wartime defoliant Agent Orange, recent environmental studies show that dioxin contamination is concentrated in several "hotspots" within former U.S. airbases where Agent Orange was stored, loaded and transferred. Areas subjected to heavy aerial spraying do not have soil concentrations considered hazardous. The United States and Vietnam have not reached agreement on the scope of possible health effects, with Vietnam continuing to argue that over three million handicapped can trace their disabilities to dioxin exposure. We do not believe that this figure can be supported by scientifically sound data and analysis. Statements that describe every child born with a birth defect anywhere in Vietnam as a "victim of agent orange" are common and remain a favorite propaganda tool for persons opposed to closer U.S.-Vietnam relations. However, our engagement on this issue has accomplished much, in both transforming the tone of the dialogue and capacity building to address environmental issues and provide assistance for the disabled. USAID has started to implement a USD 3 million Congressional appropriation for "dioxin mitigation and health activities," with the recent announcement of USD 1 million in grants to three partner organizations to strengthen services for the disabled in Da Nang. We continue to work with the GVN, UNDP, Ford Foundation and other donors to form a multilateral coalition for environmental remediation of three priority hotspots in Da Nang, Hoa Binh and Phu Cat airfields. CHINA -------------- ¶20. (SBU) While Vietnam's engagement with the United States will continue to broaden, China necessarily constitutes Vietnam's most important strategic preoccupation. Vietnam's leadership is sophisticated enough to realize that relations with China and the United States do not represent a zero sum game: it is possible to have good relations with both. Nevertheless, while China constitutes a vital and necessary commercial partner -- and shares many facets of Vietnam's single-party, market-oriented development model -- it is also perceived as a significant constraint on Vietnam's freedom of action, affecting, for example, the speed with which Vietnam can improve its relations with the United States. Territorial disputes in the South China Sea are a perennial source of tension with China, as well as a sensitive issue domestically. Vietnam is aware of Chinese pressure on U.S. firms with interests in the South China Sea, and your interlocutors may ask Congress to take a "tougher" stance. WHAT YOU CAN EXPECT -------------- ¶21. (SBU) You can expect your interlocutors to not only be articulate and well informed, but also to speak in terms generally supportive of growth in the bilateral relationship. As noted above, lingering suspicions still exist among conservatives about the development of closer ties with the United States. Nonetheless, we fully expect the overall tenor to be one of support and interest at a measured pace that will not upset the GVN's calibrated attempts to maintain balance among its other regional partners. There may be media interest among Vietnamese outlets and you should expect photographers at some GVN meetings. ¶22. (U) Again, we look forward to your visit and stand ready to do everything we can to make your visit to Vietnam as productive as possible. MICHALAK